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Cashing in on Rental Property

CNN Money recently ran an article about the real estate market’s brightest spot: the rental market. Demand is up and rent prices are rising and, “It’s partly because those foreclosures have turned more than 4 million former homeowners into renters, but also because many other prospective homeowners, worried about losing their jobs or housing prices falling a lot further still, are reluctant to buy now.” CNN put together their tips for figuring out whether or not investing in rental property is worthwhile for you and what exactly you need to know.

Why Now? According to the article, “Many factors make this a great time to invest. Mortgage rates are at a 40-year low, and homes in many areas are ultra-cheap. Meanwhile, demand for rentals has risen in more than 500 cities, according to recent Census data. That, in turn, has enabled landlords to charge more.”

Today’s average investor plans to hold on to their property for at least 10 years, according to the National Association of Realtors. Assuming you can hang on for that long, your chances at solid gains are good, especially if you are financing the purchase. The catch, however, is being able to hold on to the property for that long without needing to use the equity.

Financing may be tricky also. As CNN reports, “Most banks now require a down payment of at least 20% to 25% and evidence you have enough cash to cover six months’ worth of mortgage, tax, and insurance payments.”

How do you find a good deal? To start, it’s important to work with an agent experienced with rentals, someone who will be able to accurately assess how the property will fair in the rental market. Try to stick with investment properties that are close by and easily accessible to you, in a neighborhood that is familiar to you.

The experts at CNN Money point out that, “While prices on multifamily dwellings haven’t dropped as much as they have on single-family homes, don’t ignore plexes: Intake from a few rents instead of just one will boost your cash flow; a single vacancy won’t hurt as much; and you could benefit from economies of scale for things like appliances and painting.” Avoid stricter financing requirements, like a bigger down payment, by sticking to buildings with 4 units or less.

Once you’ve found potential income properties, make sure the numbers work out. You should make sure your rental income will at the very least cover your loan payments plus an additional 20% to cover any repairs, vacancies, property management, etc. The last thing you want is to be caught off guard by one empty month, so you should, “Assume your mortgage rate will be at least a half-point higher than rates on owner-occupied properties. Factor in insurance and property taxes, and bank on a 5% vacancy rate.”